 Pleasure to be here. This is my first time to Switzerland. My great-great-great grandfather was last a citizen of the Canton of Burr and came to the United States 210 years ago approximately. We think on a boat from Amsterdam to Philadelphia settled in southeastern Indiana in a town called Vee Vee which is of course named after Vee Vee here in Switzerland and the major settler there was the Dufour family and we passed the Dufour Street here and there was a Dufour the Rue Dufour we saw yesterday in Geneva. So we were very excited to be here and we are going to talk about long-duration common stock investing so thinking in 210 year time frames is not a bad idea. So just to set the stage today we're going to talk about investing kind of from the standpoint of John Maynard Keynes quote from way back when he said investing is the only sphere of life where victory security and success go to the minority and never to the majority. So we're going to talk about long-duration common stock investing because we believe that it's just a minority of people that want to practice it. So let's start with William Sharpe and talk a little bit about passive investing index investing. Should everyone index everything? The answer is resoundingly no. In fact if everyone indexed capital markets would cease to provide the relatively efficient security prices that make indexing an attractive strategy for some investors. All the research undertaken by active managers keeps prices closer to values enabling index investors to catch a free ride without paying the cost. Thus there's a fragile equilibrium in which some investors choose to index somewhere all of their money while the rest continues to search for mispriced securities. Should you index at least some of your portfolio? This is up to you. I only suggest you consider the option. In the long run this boring approach can give you more time for more interesting activities such as music, art, literature, sports and so on. But by virtue of the fact that you're going through the CFA education process you probably don't find those things more entertaining than what you're doing for a living because to do all the work you have to do to finish your process. But what we like in this it says all the research undertaken by active managers keeps prices closer to values and we would hypothesize that the duration of the research. Are people doing 10-year equity research or are they doing 6-month equity research and if they're only doing 6-month equity research and not doing 10-year equity research then in effect they are not serving to squeeze those anomalies out of the passive index. So from there we're going to talk about passive investing and what passive investing does right and out of looking at what passive investing does right we'll look at a bit of a template for what to do as an active investor. In other words what would you want to, what kind of disciplines would you want to practice to take away the natural advantages that the passive index has. We're going to look at valuation matters. We're going to look at long duration and high quality and then we're going to talk about why you might want to extend your duration now. In a world where you know people are afraid to go much past 6 months with their common stock investments. So the first thing is almost everyone knows in the last 10-20 years that the majority of active managers have underperformed the passive index which most people automatically think it's a cost only issue. So this just shows you can see all the numbers above 50% indicate how common this has been and then this is just another chart showing general equity 45 years of statistics and you can see here there have been stretches when active managers did quite well but for the most part it's been a tough competition. This has led to a substantial increase. I apologize almost all the statistics we're going to have are S&P 500 US based statistics but I'm sure that it translated extremely well into any developed market that you'd want to look at and probably most underdeveloped markets as well. So this has caused passive by 2012 to take 26% market share in open ended US funds and ETFs and then if you add in what goes on in separate accounts and the fact that in the institutional world there's been a big push into passive we think it might be up around 40% of the participation in large cap stocks in the United States comes from passive. Now here's the first obvious part. We'll just use US large cap stock as the original view. It's an average mutual fund expense annually of 131 basis points. A typical indexed product might have 20 or 25 basis points of cost. So what that means is the index is running a 100 meter dash and the active managers are running a 101 meter dash and so that's the first obvious and most people think that that statistic is the difference. That is the difference between a majority of active managers outperforming. Here's the turnover of the S&P 500 for 20 years averaging 4.52%. So the truth of this there's no such thing as a passive investment because the indexes are not passive. They're very lightly traded active accounts with 4.52% turnover. That means every 22 years in effect you would have turned over the portfolio and here is what has happened to turnover in active funds. Look at the trading. For years it was in the 20% range in the 40s and 50s and 60s and then it exploded to the upside and the discounting of commissions in the 1970s has been the biggest trigger. The less expensive it is to trade the more humans trade. It's just a natural progression and even for individuals in the states it's like $8.95 to do a trade. So what's happened is trading costs and fees associated with activity are a huge chewer of performance. So the Boston College Center for Retirement Research analyzed the equity funds in 401k plans and they concluded that it costs an average of 144 basis points per portfolio. So now you go back and add a substantial amount of trading costs into the annual expense of the fund and all of a sudden you begin to see why the majority of active managers are underperforming. This is a recent financial analyst journal of January, February. Great study done that looked deeply into the subject of descriptive statistics for aggregate trading costs on a 21 year basis. Ironically they came up with the same 144 basis points that the Boston College Center for Retirement Research came up with. That was the mean cost of trading. Now in the large cap U.S. space it was 84 basis points for large value, 61 for blend and 97 for large growth. So that is what you have to add to the 131 basis points we looked at before. So in large value 215 basis points of cost has to be overcome. Now you might think that those two, so that's the reason why the active managers are underperforming. We'd like to add one more significant side to that and that is sins of omission. Many of you might be fans of learning about why has Warren Buffett been such a great investor. And if you have, if you've ever seen him speak in public or at a college, they always ask him what's your biggest mistake. And this answer is always, it's sins of omission. Something I've owned before that was a spectacular success after I sold it is what has cost me the most money in my career. So we believe that this 245 basis points of cost, there's some figure, it's hard to quantify because it's so many different portfolio managers, but there might be 300 basis points a year on average between expenses, trading costs, and then sins of omission. So in 1996 Buffett was being interviewed by the University of North Carolina business students and he said my biggest mistake in my career was that in 1965 I bought 5% of the Disney Corporation for $4 million. In 1964 they'd introduced the movie Mary Poppins. It was a huge, biggest blockbuster up to that time. The next year there was no blockbuster so their revenues were going to be significantly lower the next year. So in the process of the revenue coming down, it's a classic growth stock. Growth investors flooded out of Disney and so here sits Buffett to buy 5% of the company for $4 million. One year later the stock had risen 50%. Buffett sold it. When he spoke to the students in 1996 it had already been a 250 bagger and now it's like a 1,250 bagger. His $4 million would be $5 billion. So we run a concentrated equity portfolio. If you run a relatively concentrated equity portfolio and one of your 30 stocks was Disney and you just kept a 5% position in it all those years you had a marked statistical effect on there's a huge amount of alpha added to the portfolio by that stock. Breaking down 33 large cap funds by activity quintile and you can see that over 3 years you benefited by 150 basis points improvement in performance from the lowest turnover to the highest 90 basis points a year for 5 years and a benefit of 10 years of 2.2% or 220 basis points. Sit down with your calculator and compound 2.2% for 10 years and you find out you come out with what 30% of portfolio improvement in a 10-year stretch by that turnover difference which leads to in the long run long duration leads to better risk adjusted results. So you not only get better results you get better risk adjusted results. Now all of this has to come the fact that I was talking to two gentlemen here that are portfolio managers at their company aspiring stock pickers and you have to deal with the fact that the human beings that you work for are done. They buy high and they sell low. So they pour money into you when stocks are popular and they take money out when stocks are out of favor. So all of everything we're talking about is also within the context of the target audience be it institutional investors or be it a high net worth and ultra high net worth individuals they have to be led and therefore anything that gets them away from the urge to make changes. So we would argue that long duration is effective for that. Here's what it shows the average equity investor loses about 55% of the benefit of owning common stocks by the fact they come in and out all the time and they have a tendency to come in at high points and out at low points. So just to summarize real quickly passive does a number of things quite well. They keep their turnover down. Therefore their trading costs are minimal. It's a low cost way to participate and they hold their winners to a fault. In the case the S&P 500 is a price weighted index the better stock does the larger factor it becomes in the overall portfolio. Market weighted. I'm sorry market weighted. Dow Jones is price weighted. The S&P is market weighted. So the bigger the more successful Apple is the larger position it becomes in the S&P's portfolio and the more impactful it is. So therefore they're naturally a let your winners run kind of a portfolio and that's a real positive attribute. So we're going to talk about some of the things that can deal with the natural advantages that passive has. So the first one is that valuation matters dearly. This first one we love. Going back to Sharpe's original comment. Research analysis does a fantastic job of predicting whose earnings are going to grow the most in the next 12 months. This chart shows that the highest PE stocks produce the best earnings growth and the lowest PE stocks produce the worst earnings growth. And that analysis is very consistent. So research analysts do a great job in 12 month time frames. The only problem with that is that one year later it has reverse attributed. The good earnings success and participation in the companies that produce the best earnings success loses to 200 basis points to the average and the dogs of the index the dogs of the earnings world produce 300 basis points in the next 12 months in positive attribution. So here's the form of French on large value blend and growth and then small value blend and growth. Cheap stocks provide a reward. The index has no ability to to exact valuation mattering. When technology stocks were all the rage in 98 99 there was nothing to stop the S&P from being 40% technology and telecom. The Toronto Stock Exchange the entire market capitalization of the Toronto Stock Exchange at the end of 1999 30% of it was Northern Telecom. Just that one company was 30% of the entire. It was the only major tech telecom company in Canada. So Canadian investors poured in to the trend. This same thing is shown by the Bowman Conover Miller study in 1998. This looked around the world by PE price to PE price to cash flow price to book price to dividend yield. We choose your favorite way to examine valuation and and and make valuation matter but pick one. They all work. They all work. They all show 440 basis points different between the cheapest stocks and the most expensive 430 570 and 480 basis points. So it really works. Valuation matters quite dearly. David Drehmann Contraint Investment Strategy. Very popular book. Their 40 year results were the lowest PE quintile produced not only the best dividend yield but also the best capital appreciation. Everybody looks and they say how is that how could the best cash capital appreciation. Just imagine what that list looks like each year of the 100 lowest PE stocks in the S&P 500 index. It's basically a list of everybody who hasn't been doing very well lately. Right. The business hasn't been doing as well as it normally does. And so investors have spent the prior years flooding out of it. It's a dog's list in the S&P. But here's the beauty of it. There's an equal amount of luck that comes out of all five quintiles. Is everyone with me on that? In other words there's 100 companies in each quintile and there's about an equal amount of luck that comes out of it. So therefore in 2003 Apple was trading at $25 with $12 in cash. It very possibly was in the bottom PE quintile or possibly the bottom price to book quintile at that time. And so there you go. It got in there and then goes wild. And so you get an equal amount of luck out of all five quintiles. But it's what you pay for your luck that matters. This is the study. Francis Nicholson's classic binary study. Here's what we love. All the other studies I've shown you are rebalancing each year. They're going to buy the 100 lowest S&P stocks each year. Dreamons is reset to the 100 cheapest. Now a number of companies stay in the dog house for a while. So there's some static nature to that. Nicholson's study is static. This is what the five P quintiles did if you bought them and did nothing. Notice how the black bar gets farther and farther and farther separated from the other bars. You all see that on the chart? In other words the valuation mattering dearly compounds itself in a beautiful way. It's the gift that keeps on giving. And we're value managers. Value managers are totally guilty of arrogance. Now what I mean by that? Well they look and they go, I'm going to buy something at 50 cents on the dollar and it's going to go to 90 cents on the dollar. I'm going to sell it and I'm going to go back and I'm going to find something else at 50 cents. Isn't that kind of traditional value managing? Well there's just one problem with that. The problem is that the cheap stock that they already own is a gift that keeps on giving. They're committing a sin of omission in many cases because it's a moving target. And that intrinsic value can move quite a bit over the years. So what that causes, this is $1,000 invested in 1957 at the far left hand side growing to $500,000 in the S&P 500 versus, excuse me, in the low P.E.s. versus $175 for the index. Three times the return in a 50 year time frame from the added benefit of valuation mattering. The second thing that can make a lot of difference is long duration and high quality. Now what we're getting at is you should do your research and your stock picking in a way that can cause you to keep your activity down. Because if you keep your activity down, you do two things. You save money but you also are much less likely to commit a sense of omission of getting away from what ends up being your best performing common stocks. Is everybody with me on that? So it's a two fold thing. But if you don't go in intentionally, for example, I torture coal regularly because they'll be things I observe. And they're not companies that can qualify under the criteria that we use for picking stocks. But every one of my kids will sign up for Netflix five years ago. And I'll take a look and Netflix is $30. And then I look up five years later and it's $300. And I'm a bit of a greedy guy and I'm like, gosh, I like to get ten times my money. Right? It's great. Well, it's not mature enough. It has too much risk attached to it. It's not the kind of company that we buy in a large cap value portfolio. But that doesn't stop me from fantasizing about it a little bit. So remember, the old fairy tale, the tortoise and the hare. Right? The hare is just really fast. It's going out in the lead. But then the tortoise ends up winning the race because the tortoises keep clotting along. And that's kind of what... So a longer ration requires high quality. In our world, we have eight criteria for selecting common stock. If you're a young aspiring stock picker, you need to create your own criteria. We're not here to inflict that. In our case, these are five of our eight criteria that we think speak to high quality. Because high quality is an important part of long duration. Because if you don't own meritorious things and things go against you for a while... And by the way, it's a guarantee that they're going to go against you for a while. It's a guarantee that you're going to be out of favor. You're going to underperform for 35% of the time. They studied John Templeton, John Neff, Peter Lynch, Warren Buffett and I think Phil Carray. The five best long-term track records in modern stock picking history. And they found that on average they underperformed the market 35% of the time. So it's a given that your companies will go through difficult phases. It's a given that your portfolio will go through markets where your style is not popular. So therefore you want to have high quality. In our case, meet an economic need. The Disney Corporation is the most successful babysitting organization in the world. They babysit children and they babysit primarily adult males that are sports fans through a company called ESPN. So they babysit people. So they meet an economic need. They have a very wide moat. How many people do you know that get up in the morning and aspire to create the most successful wholesome family entertainment company in the world? Does anybody know somebody that's aspiring to do that right now? How many of you know an aspiring software engineer that's trying to create the most fantastic software to put Google or Microsoft or Facebook out of business? I think you all know one. There's three million of them out there. You see, if you're wondering why tech stocks have low PEs, it's because there's too much competition. See, one thing people forget in our business and if you take two or three things away from today, do not divorce yourself from the economics that you learn in your undergraduate education. I think that's the biggest sin of portfolio managers. What do I mean by that? Zurich's a big town. Let's say there's 100 plumbing companies that operate in Zurich. And let's say that the plumbing business has been really good in Zurich lately. And about 40 more companies are going to come in and set up shop as plumbing companies in Zurich. Now, in good old fashioned basic economics, what does that tell you about profit margins and profits for the existing 100 companies? What's going to happen as 40 new companies come in town to start sharing the existing business? What's going to happen? They're going to go down, right? Way more people supplying the service and not way more people in Zurich. Now, here's the weird thing. In the investment business, the first thing that investors do is they go, gosh, the profits are so good in plumbing in Zurich that a whole bunch of people are coming down. I'm going to bid up the common stock of the existing plumbing companies. Don't laugh. That's what they do. Think about the last 97, 98, 99, there was a flood of technology stock initial public offerings, right? And people kept bidding up the existing ones, Cisco and Microsoft, and they kept going way up. And every week there was just an onslaught, billions of dollars of IPOs of new tech companies. What should smart people have done with that information? Well, they should have sold the ones they had at a minimum. We said, we owned some IBM and Hewlett Packard back in those days, and we got out of them in mid, late 98, because if there's going to be a hurricane in Miami, you don't want to be in Palm Beach. So that's, yeah, white moat. You have to be defended from competition, high and consistent profitability, high levels of free cash flow, strong balance sheet. These are qualitative aspects of a company that allow you to own them for a long time. When Johnson & Johnson was hit by someone poisoning a bottle of Tylenol in 1984, they had the balance sheet to withstand that public relations nightmare, which was reestablishing the confidence that everyone had in their company. All of this is designed to get at the economic return, the fundamental return, that's provided by Common Stocks. The grant of Mail Van Otterloo organization, led by research from Ben Inker, did a 24-year study on factors that they could define as high quality. For them it was low leverage, that's our strong balance sheet, high and consistent profitability, low earnings volatility, and then boring stocks. Humans are more likely to own boring stocks for 20 years than they are exciting ones, which goes back to the Netflix. That's one of the reasons why it's not such a good idea, because what can the humans stand that are involved? So you can't just add these above line alpha additions, because many of the same companies had all four of these characteristics, but it certainly is a positive addition. Here's another study that Ben Inker did at Grant of Mail. 50% of the intrinsic value of a common stock in the United States comes from cash flows more than 25 years from now. When was the last time somebody looked at a stock against a series of other stocks and asked the question, who's likely to last the longest? Because let's face it, if you're mathematically inclined at prevailing interest rates right now at 3 and 4%, a dollar 70 years from now discounted back into present dollars at a 3% discount rate is meaningful money if you stack a 50-year series together. Right? Year 50 through year 100 discounted to today has a huge effect on the intrinsic value calculation of a business. The average business on the S&P 500 lasts 50 years. So if there's something about your research that would cause you to think in longer durations more than 10 years, because 75% of the intrinsic value of a business comes from cash flows more than 11 years from now. So, valuation matters, long duration and high quality. The next thing is why extend duration now? We'll run through some of these things very quickly. First of all, as of February of 2009, the 40-year look back was one of the three worst 40-year look backs out of 545 look backs. In other words, the three worst performances in U.S. equities on a 40-year look back basis were 3.85, 3.86 and 3.9% real return. Now think of the world we're in right now. People have a massive amount of money in bond investments that mathematically cannot possibly approach the worst 5 standard deviation event in equities. Think how illogical that is. But yet the last three or four years, institutions around the world in the United States, high net worth and ultra high net worth individuals have poured money into bond investments the last four years and net liquidated U.S. large cap. If you're wondering, the last 40 years as of a week ago, or no, 8.31 a month ago was six and a quarter. So to go back to that breakdown, six and a quarter puts you in the bottom half of 40-year look backs. In other words, if anybody asks you, well, on a 40-year basis, you're coming in at maybe a slightly undervalued position. And that's pretty much what we believe is a firm. And then you have to understand that the people around you are just as active and impatient as they ever get. This is just the New York Stock Exchange. This is the average holding period on the New York Stock Exchange. It dropped below a year for three or four years. People who don't own companies, they rent them. And they don't even rent them on very long leases. High frequency trading, which is like milliseconds. Okay, now we've got it down to milliseconds. See, people want to shorten duration. By the way, there's some very human and normal sides to that. How many people are going to die someday? All of them. We have a finite number of years. We would like to get wealthier and quicker because we have finite years. That's just natural. But here's the great conundrum. There is a continuum for getting wealthy that has to be respected. That's in effect the argument we're making on long duration common stock. That's why it's a contrarian manifesto. In other words, it's what the humans don't want to do. It's what the young stock pickers don't want to do. They'd rather find the Netflix at 30 and write it to 300 and then try to go find a new Netflix. The problem is, statistically, it's not going to work that well. Another good reason to extend your duration, in our case, this is arguing from a U.S. large cap standpoint, is commodity prices in the United States, which are an enormous factor in how well the U.S. economy does. Commodity prices, this is a year-end lookback. This is a 10-year return lookbacks. If you looked at a month in, July of 2011 was the end of the best 10 years that commodities ever did in U.S. dollar terms. A 14% compounded return. And it was the best stretch that commodities have ever had versus equities in the entire history of the United States. So we believe in reversing the mean. Are there any other reversing the mean people out there? We think commodities entered a bear market two years ago and that bear market's probably going to be a 7 to 10 year event because the largest population country in the world is using 40% of the inputs in the world and they haven't had a business cycle for 30 years. And we do not believe that any government is capable of violating business cycles. Just a couple of pictures. Oil is the bottom line here. This is how oil prices did between 1984 and 1999. By the way, quick quiz. Was there more people in the world in 1999 than there was in 1984? Answer? Were there a lot more middle class citizens around the world in 1999 than there was in 1984? So why do people constantly make that argument to us? But Bill, you don't understand. How can commodities go down? We have this enormous 400 million emerging middle class citizens around the world. Well, you're always going to have that. So how come commodity prices never go down? I mean, they should go up all the time. There's always more people and there's always more middle class citizens. And the answer is when oil went nowhere, the United States stock market did spectacularly. And when oil was spectacular, the United States market went nowhere. Now here's the real quick lunacy. In 09, 010 and 011 on the bounce back from the horrendous market we had in 07 through 09, they had these risk on, risk off days where people would go out and they'd buy stocks and they'd buy oil at the same time, which on a long run basis makes absolutely no sense whatsoever. What's good for oil prices is good for about 10% of the US population that live in Texas and Wyoming and North Dakota. And for the other 90% of the population, it's a nightmare because they have to drive an hour to work or take another form of transportation whose expense goes up with energy. Households in the United States have the lowest household debt service ratio they had for a long time. There are 86 million 18 to 37 year olds in the United States. The average person in the United States gets married at age 28. That's the heart. We like to say when we travel around, we'll be on panels with people from emerging markets and so forth. We like to say that the millennials in the developed countries are the most exciting emerging market in the world right now. Because they've been kind of slow to get married and kind of slow to have kids, but they'll get married and they'll have kids and then they'll need a car that needs a car seat and they'll need a house so that their apartment neighbors don't hear their baby screaming at 3 in the clock in the morning. We had a housing depression the last five years in the United States, so there's some opportunity coming off of that. We have the most affordable housing. As stock pickers, if you're wondering about capitalization, small has crushed large in the United States in the last 10 to 12 years. A lot of people don't know this, but that's a function of in 1999 when oil was $11 a barrel. Many of what are considered to be the major North American energy companies like Apache or Anadarko or National Oil Wall of Arco or Canadian Pioneer Resources or Canadian companies, they were all micro caps when oil was $11 a barrel and then they became small caps and they did great and then they became mid caps and they did great and then they became large. So small tarred and feathered large primarily because of the price of oil. Small is expensive at 27 times trailing. Large is not cheap at 16, but relative to small, valuation matters dearly. Americans have poured money into emerging markets to make money from all these new middle-class citizens that we know happened in the 20 years prior as well and didn't make a difference. You see, this theory that people in countries that make $7,000 a year are going to all want to live like people do in Switzerland and the United States it might happen in 100 years, but it'll take three or four generations for that to happen because the average per capita income in the United States is 51,000. So just because you got a lot of new middle-class people, if they make 10,000, you've got to have five times as many of them. I'd rather have 86 million people doing it. Correlations are the highest they've been almost in history, meaning there's been very little differentiation. That leaves lots of opportunity for differentiators from a stock-picking standpoint. So in summary, passive has significant advantages. Low trading costs because of low turnover. They hold their winners to a fault. They have lower expenses, and they automatically have longer holding periods because of the low turnover. A prescription for active investing would be, first of all, do long-duration research, which would put you in a position, hopefully, to own for long durations, therefore taking away the trading cost and low turnover advantage by valuation sensitive. That's the way you gain an advantage over the index. The index has to sit there and own their most overpriced securities. They have no way to discourage them. Vice versa. They don't have any way to add to their positions in their most undervalued securities. And then, of course, practice low turnover. And let me stop there and see if there's questions. Yes? Basically, we're all international investors here. Have you been looking at the effect that non-US dollar or international currency actually has on your strategy? You've got to take this gentleman on the road with us. That's exactly the question. Did everybody hear the question? The most important thing right now in the world is a currency issue. The most important thing in the world right now and the thing that's got more capital misallocated is the fact that the U on is pink to the United States dollar. So let me take you back to your econ history textbooks. When there was a gold standard, if a country boomed for 20 years, what happened economically with their country? How did people pay you for the things that you exported when we had a gold standard? How did they pay you? They paid you in gold. What determined the money supply in your country? Your stock of gold. So if you boomed for a while, you automatically took in a whole bunch of gold, your money supply boomed, inflation, wage inflation, all kinds of inflation. You became very uncompetitive on the world stage and your trading partners things became undervalued and you became overvalued. Now, I'm not somebody that argues we go back on the gold standard because currencies do quite a good job of that same thing if left to their own devices. But the largest population country in the world has pegged their currency to the United States dollar. So they boomed for 20 or 30 years and they have not had the kind of currency appreciation that would be commensurate in theory with that boom. And here's the worst part of it. Since they're pegged, the United States has had to do this monstrously easy monetary policy with QE and the whole lot and in effect that hasn't affected what's gone on the U.S. That's all gone into flats in Beijing and Shanghai and London and maybe some here too, I see a grant. Maybe you sold one to somebody here because that easy money is just transferred. So that's your question. We believe that the United States has successfully well on its way to cleansing our economy and it is going to strengthen slowly but consistently and as it does interest rates will rise. Simultaneously the trade deficit in the United States is traditionally half oil imports and we now know that the United States is going to be a very large producer of oil. Therefore our trade deficit is going to shrink. Our dollar is going to strengthen and then there's a country called Japan that's doing virtually everything in their power to strengthen the dollar against the end and so the process of forcing China through the normal business cycle has started. Just go back and look at October 24th when the yen was 80 and look at what's done well since then and what's done poorly since then and what's done poorly is gold, emerging markets etc. Now back to your question. So in our view we think that developed world countries that do a good job of cleansing their economy and then also can increase their population and the interest rates go up with it should be an attraction to currency and currency will strengthen. So again we're not international experts but we do think that the asset allocation in the world is kind of all screwed up right now because the Chinese Yuan should have gone crazy theoretically and if we'd had a gold standard unequivocally would have. So I love this conversation that everybody's having is if we can just get them to become a consumer society instead of being a fixed asset investment society well it took the United States what 100 years to become a consumer society and you just don't snap your fingers and go oh we're going to be a consumer society. So the answer is I don't know but I think that commodity chart tells you a lot. Which currencies are going to become less valuable as commodities go down in price? Which currencies are going to become more valuable as commodities go down in price? That'd be a pretty good template to us. Is that helpful to answer that question? So it doesn't necessarily tell you exactly where to go but it certainly tells you where to stay where. Hopefully. Yes, other questions? Yes. The most confusing thing about the investment industry is that depending on the people you meet they tell you different things. Oh, yeah. Maybe you make some recently mentioned he was quite foolish on commodities. Yes. Now you're sitting here you know a few weeks standing excuse me a few weeks later and telling me that for the next seven years probably commodities are going to go on to CNBC, go to their site. I debated him for 45 minutes on World Wide Exchange three years ago. And see what he was saying then. Okay. He was on Maria Bartiroma's show a year ago and he told Maria that she needs to go into farming. Corn was $8.50 of bushel and it's $4.50 right now. You don't lose half your money on that trade. You lose 10 times half your money on that trade. Anybody that took his advice a year ago is completely wiped out on that trade. Okay. I spoke to the Hay Growers Association of Pacific Northwest in the United States last February. The price of acreage for farmland is so overpriced it's on a 1% cap rate. It's like London flats. Okay. Now why does he say that? His name is on two indexes. One is a commodity index and the other one is a commodity equity. In other words, deer and cat and other companies that play to the agricultural industry and the more money that goes in those indexes the more Jimmy makes. Okay. It's pretty much that simple. He's on TV and says buy bonds because he's with PIMCO. I come here, right? That's what I'm saying. You know it's not really confusing. Well, no. Look. Look. Look. It's Warren Buffett the wealthiest man from picking stocks that's ever existed. So emulate his behavior. That's all we're arguing. Okay. There's a thousand ways to skin a cat. Remember, there were four different value metrics I said you could use. We're not book value shop but you could use book value. We're not a price to dividend shop but you can certainly use dividends. That's all let your own personality govern what your checklist is. What we do know is if you get trading stocks all the time you burn up your success. You throw money away. We've had two different people as we travel around the country and the world tell us the more you rub it the smaller it gets. Okay? Yeah. I'm quite in line actually with your approach. There's just one thing I'm wondering. Investors that do single strategies that you seem to do that have one big challenge is that they have to avoid the value traps. Oh yes. Yeah. And I wanted to know how they do over time but what about these value traps? Everybody tracking with this question. It's a great question. It's really a great question. We run a relatively concentrated portfolio so we own 25 to 30 securities. We basically the Zurich Film Festival is in town. We're standing at a hotel right next to one of the theaters that's hosting it. The arenas. So we audition actors and actresses. That's what you do when you're picking stock is you're auditioning people, companies to be part of your portfolio. And the job of the portfolio manager is to know that you're going to be wrong 30% of the time. Maybe 40% of the time and still significantly outperform. So we buy and we spend most of the time trying to figure out where we're wrong and not spend very much time trying to figure out where we're right. You see? Which is effectively the index can't try to stop the bleeding too much. They ride Eastman Kodak down to almost zero and they ride General Motors down to zero. So there's another advantage for you. So the answer is it's not that you don't take your shots at some of these deep value things that might be a value trap. You just have to have a discipline for how you deal with it in the first three or four years that you own it. You buy it and you think of it in terms of, well, it's on probation. It's got to prove to me that it can be successful. Yeah. Yes, question? There's three things here to be prescription practice investing. I would argue that the valuation sensitivity is the least important out of those because if you're really successful in finding these long duration quality companies and you do the low turnover thing, something that is expensive in the beginning will still be expensive. Yeah, so why do you care? Yeah, really long time frames that is true. We looked at a study the other day. If you have a company that earns 6% on equity for 20 years and then you have a company that earns 18% return on equity for 20 years, if you pay a 25 multiple to buy the 18 return on equity, it's got to keep the 18% return on equity for the 20 years, you make 14% compounded on your money if it ends up being a 15 PE stock at the end of the 20 years. Is everybody with me on that? You make 14% compounded because they have such high returns on equity all during that time period. If you buy a company that earns a 6% return on equity you have to pay three times earnings to get the 14% return for it to be 15 multiple at the end of 20 years. So Charlie Munger says there's really smart people out there that can buy 50 cent dollars and then they go up and they find new ones and he says that's really hard. He's going to sit on your arms. That's easy, he says. So what if you combine both of those? What if you try to be valuation sensitive with companies that are meritorious like that? You've just hit the core of what we... It just requires a lot more patience. It's not so much difficult. The difficulty is being patient. You don't have to swing. It's not a corner kick. Nobody has to kick it. You can just sit there with a ball in the corner. Nobody has to kick it. That's great. Back to the 10 or 30 year exiting the benefits of buying low average high cost companies. As a practitioner how do you rationalize this outperformance of better quality versus lower quality? Is the hype of everybody wanting to face an IPO or the next thing? Well, Nicholson proved that you could just buy the dogs and leave them alone for seven years and you were going to be there for everybody. So that works. We believe Buffett is so wealthy because he got the best money that John Templeton made and he got the best money of a great growth investor like Phil Fisher or Phil Carey. So he bought them like a devalued person deep point of maximum pessimism John Templeton and then he held them for a long time like a growth stock investor. So he made the value money and he made the growth money and that makes a much higher compound of return than somebody just limits themselves to value or growth. It should make higher returns but it's more work. Well pointed out. Thanks.